Brazil's Central Bank to Hike Rates Sharply Next Week

Brazilian interest rates are set to rise sharply again next week, a Reuters poll showed on Friday, as the central bank attempts to boost its inflation-fighting credentials even as signs of a recession continue to grow.

Forty-two of the 48 economists surveyed in the poll expect policymakers to raise the benchmark Selic rate by 50 basis points to 13.25 percent on Wednesday, giving Latin America's largest economy one of the highest interest rates of any major country.

The remainder expect the bank to opt for a smaller 25-basis-point hike.

The central bank led by Alexandre Tombini has raised its key lending rate uninterruptedly since October as inflation surpassed 8 percent, a 12-year high and well above the bank's 4.5 percent target.

Some economists say the central bank is to blame for tolerating above-target inflation from 2010 to 2014 and slashing interest rates to record lows amid government efforts to spur economic growth.

The central bank must now demonstrate it is serious about changing course and meeting its promise to bring inflation back to its target by next year, economists said. President Dilma Rousseff's center-left government already is slashing spending aggressively, which will restrain inflation but hurt economic activity.

"If the COPOM (central bank's policy-setting committee) wants to strengthen the credibility of its commitment to the 4.5 percent target, it cannot be seen as an institution that is eager to ease the policy stance whenever it has half a chance," wrote Mario Mesquita, chief economist at Brasil Plural in Rio de Janeiro and a former central bank director.

Two new central bank directors will join the policy-setting committee next week. One of them, former Nomura economist Tony Volpon, was a vocal critic of the central bank's rate-cutting policy.

According to Citigroup's chief economist for Brazil, Marcelo Kfoury, who also expects a 50-point hike, recent improvements in inflation expectations would be enough to justify a lower increase in the key lending rate.

Brazil is believed by many economists and investors to have slipped into recession, sending Rousseff's popularity to near record lows.

That means the central bank must be careful not to badly damage the weak economy while it promises to remain vigilant on inflation, said Arnaldo Curvello, an economist with brokerage Ativa Corretora.

"By global standards, Brazilian rates are stupidly high for the country's risk level. The central bank has done its job and should take this cycle to an end."

Brazilian interest rates are set to rise sharply again next week, a Reuters poll showed on Friday, as the central bank attempts to boost its inflation-fighting credentials even as signs of a recession continue to grow.